Current Yield

This page walks through the current yield formula for bonds and stocks, then applies it to the premium/discount/par yield ordering and the related yield-to-call measure that the exam tests alongside it.

How Do You Calculate Current Yield?

Current yield measures the annual income an investment generates relative to its current market price. It applies to both bonds and stocks, making it one of the most versatile yield calculations on the exam.

For bonds:

• Current Yield = Annual coupon payment / Current market price
• For a fixed-rate bond, the coupon payment is fixed at issuance, so current yield changes only when the market price moves
• Example: A $1,000 face value bond with a 5% coupon pays $50/year. If the market price drops to $900:
  • Current Yield = $50 / $900 = 5.56%
  • The yield rose because you are buying the same $50 income stream for less money

For stocks (dividend yield):

• Dividend Yield = Annual dividend / Current stock price
• Example: A stock pays $2/year in dividends and trades at $40:
  • Dividend Yield = $2 / $40 = 5%

Exam Tip: Gotchas

• Current yield only considers income (coupon or dividend). It ignores capital gains and capital losses. If a question asks about "total return," current yield is not the answer.

How Does Current Yield Differ From Total Return?

• Current yield only measures income return - it ignores capital gains or losses entirely
• Total return captures both income and price changes, making it the more comprehensive measure
• Yield and price move inversely: as a bond's price rises, its current yield falls (and vice versa)

How Do Bond Price and Yield Measures Relate?

The relationship between a bond's price and its yield measures follows a predictable pattern:

• A bond purchased at a discount will have a YTM higher than current yield because the investor also gains the difference between purchase price and par at maturity
• A bond purchased at a premium will have a YTM lower than current yield because the investor loses the difference between purchase price and par at maturity

Exam Tip: Gotchas

• Current yield only measures income return, NOT total return. A bond purchased at a discount has a YTM higher than its current yield because YTM also credits the gain between the purchase price and par, realized when the bond matures and pays back full face value (not a gradual price change before then).
• The exam frequently tests the ranking of coupon rate, current yield, and YTM for premium and discount bonds. Memorize the order above.

What Is Yield to Call?

• Yield to call (YTC) measures a bond's return assuming it is redeemed early at the call price on the call date, rather than held to maturity
• Uses a shorter time horizon (to the call date) and the call price instead of par value; like YTM, it assumes coupon payments are reinvested
• Relevant only for callable bonds. For a non-callable bond, yield to maturity remains the most comprehensive single return measure

Exam Tip: Gotchas

• Yield to call does not assume a direction for interest rates. It is simply the return if the bond is called at the next call date. For a non-callable bond, yield to call does not apply at all, and yield to maturity is the measure to use.

What Should You Check on Exam Day?

• Current yield = annual income / current market price; it never captures capital gains or losses
• Yield and price move inversely
• At par: coupon rate = current yield = YTM
• At a premium: coupon rate > current yield > YTM
• At a discount: coupon rate < current yield < YTM
• Yield to call uses the call date and call price instead of maturity date and par value, and applies only to callable bonds